AUD plunges amid uptick in US service activity

Daily Currency Update

The Australian dollar opens lower this morning giving up early highs north of US$0.6850 to trade back nearer US$0.67. Further easing in China’s Covid restrictions designed to increase mobility and economic activity helped fuel Yuan upside, dragging the AUD toward intraday highs at US$0.6852 before stronger than anticipated US ISM services data prompted a risk-off shift and USD rally. Markets remain sensitive to US monetary policy expectations and the surprise upswing in services activity helped drive US treasury yields higher while adding support to the USD as analysts re-position expectations for a peak Fed Funds rate. The AUD has fallen sharply through the latter hours of the overnight session, tumbling back through US$0.68 and US$0.67 to trade at US$0.6692 at time of writing.

Our attention now turns to the RBA’s last policy update for 2022. Most analysts anticipate policymakers will lift rates by 25 basis points, taking the official cash rate to 3.1%. We expect little AUD reaction leading in and out of the policy announcement unless the RBA chooses to surprise investors and pivot away from recent forward guidance and rhetoric. We expect the AUD to trade between US$0.66 and US$0.6850.